Since January 25, people have been wondering whether Carl Icahn
)) long on Herbalife (
) and ((
)) whether his position is of a personal nature -- i.e. taken in
order to screw Bill Ackman. We got the answer to the former in the
shape of a
filing this last Thursday, in which Icahn unveiled a 12.98 percent
stake in Herbalife. The latter question is harder to answer. A
detailed look at the filing and the time frame of the position
buildup proves inconclusive.
The timeline of Icahn's position build-up
From the filing, we know that Carl Icahn built his position in
two time frames separated by the month of January up to the Friday
of his on-air CNBC bout with Bill Ackman.
Here are Icahn's two phases of Herbalife buy-in:
- December 20 - 24, 2012: Icahn accumulated 1,672,807 shares,
or 1.55% of the entire float outstanding, during three trading
sessions between these dates. He shelled out $53,822,937, or
$32.18 per share.
- January 28 - February 14, 2013: From the Monday following his
on-air argument with Bill Ackman, Icahn proceeded to build his
position at a clip of 0.88 percent of Herbalife's entire float
per trading session, or an additional 11.43% stake on Herbalife's
entire outstanding float. This was done mainly through call
What exactly does Icahn hold?
Here is what Icahn bought in the second round [following the
- Between January 28 and 29, he purchased 800,000 shares for an
average cost of $39.96 per share. Total tab: $31,964,000.
- Between January 28 and February 11, he purchased
American-style options on 8,311,738 shares for an average premium
of $10.27. The calls' exercise price is $26 and the expiration
date is January 28, 2015. His breakeven price on this position
portion is $36.27/share, not adjusted for the effect of any
dividends (which Herbalife does issue). Total tab:
- Between February 12 and 14, he purchased American-style
options on 3,230,606 shares for an average premium of $13.29.
These calls expire on May 10, 2013 and are exercisable at
$23.50/share, making his breakeven price $36.79 per share. Total
(click to enlarge)
During this time, Icahn has also sold puts corresponding with
the size and expiration of his two calls. This is further evidence
of his bullishness on Herbalife shares, which at the same time
helps him finance his calls with the premium reaped at sale, as
by Jon Najarian. So, the simultaneous calls and puts give Icahn the
same exposure and risk as owning underlying shares. Unlike buying
underlying shares, however, this strategy allows Icahn to finance
the transaction by putting up a far smaller amount of capital,
which for the option portion equals the premium paid for calls less
the premium charged for puts.
One drawback of the option portion is that Icahn will not be
eligible to receive dividends unless and until he exercises. This
drawback should be offset, by far, through the efficiency of
capital allocation afforded by the option trade: as of Thursday,
Icahn has $214 million (less premiums charged for the puts) tied
into the trade, as opposed to the $506 million he would have needed
to finance an all-equity position. In contrast, he gives up roughly
$4 million dollars per year in dividends from Herbalife.
What motivates Icahn's position?
The timeline of Icahn's position on Herbalife initially inclined
me to think that smiting Ackman was the main motivation. However,
looking at the Herbalife chart during the "quiet" period of the
build-up reverses that theory, and instead underlines an economic
function to the timing of the position ramp-up.
(click to enlarge)
Let's dig at both sides of the motivation argument.
The case for spite
As detailed above, Icahn snaps up a sizable $50 million-plus
stake in the three sessions following Ackman's December 19, 2012
presentation and then stops. He bought exactly 1,500,000 shares on
December 20 and 21, and only 172,000 on December 24 (when shares
reached their lowest level). Could Icahn have had his fill on
Herbalife? After all, it is unclear how familiar he has been with
the company up to that point.
Enter the CNBC showdown on January 25 -- no description of what
happened that Friday is needed. The following Monday, Icahn spools
up "the mother of all" long positions, first through the
accumulation of another 800,000 shares, and then nearly 14 times as
much through options. All of that in 13 trading sessions. Either
Icahn boned up a great deal on Herbalife during January, or that
Friday's exchange "enhanced" his due diligence.
The case for a good scale-in
Into January, Icahn owned some 1,673,000 shares at an average
cost of $32.18. Herbalife shares spent almost no time below $35 for
much of that month. Therefore, it could have been that Icahn
thought Herbalife had some more to fall before he bought some more.
In fact, at the time of the CNBC clash between him and Ackman,
Herbalife was trading somewhere north of $40. By the time he bought
in on the Monday following the debate, shares had started to dip
below that level, never really recovering until Icahn's own 13-D
filing was released last Thursday. Considering all of this, Icahn
can be viewed as one hell of a market-timer with regard to his
position-building, His cost basis, as of Thursday, stood at $36.11.
Talk about adding on weakness! Most importantly, at this point we
cannot rule out that he is done buying. His next filing will
So, spite or economic sense?
Icahn has not minced words regarding his feelings for Ackman, so
squeezing the younger man out of a precarious short position is
bound to make the veteran raider's day. On the other hand, he has
also said that "there is plenty of money to be made here." As it
stands. even at Friday's low of $38.56 per share, Icahn's
half-billion-dollar Herbalife stake is sitting on at least 15
percent unrealized gain, or $33.4 million on a less than $214
million invested capital.
Should things get dicey, Icahn's position is exercisable at any
time he chooses before the expiration dates on his American-style
calls. His European-style puts are also exercisable at the earliest
of expiration date or exercise of the associated American-style
calls, according to the filing. Therefore, Icahn can exit at any
point he deems appropriate.
The same cannot necessarily be said of his "adversary" on the
Herbalife trade. Bill Ackman has made much ado about his $0 price
target for exiting his short position. On top of it, there is a
moral hazard to Ackman's premature exit of the short position,
following his much publicized bear raid. Ackman's cost base lays
somewhere around $45 per share, so currently he is still
comfortably in the money.
Is Icahn's Herbalife stake a position out of spite? It may very
well be. That said, the position's parameters indicate a ballsy and
nearly flawlessly built long trade that looks to have a great
risk-to-reward ratio. Putting the screws on Ackman may simply be,
in Icahn's own words, "the strawberry on top of the cake."
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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